Raffles Medical - DBS Research 2019-04-30: Investing For The Future

RAFFLES MEDICAL GROUP LTD (SGX:BSL) | SGinvestors.io RAFFLES MEDICAL GROUP LTD (SGX:BSL)

Raffles Medical - Investing For The Future

  • RAFFLES MEDICAL GROUP LTD (SGX:BSL)'s 1Q19 net profit fell 14% y-o-y; excluding start-up losses, NPAT grew 2.1% y-o-y. 1Q19 EBITDA grew 1.6% y-o-y to S$24m despite startup costs, within expectations.
  • Raffles Hospital Chongqing registered 500 patients in 1Q19; signed corporate (SOEs and MNCs) contracts.
  • MCH has turned profitable.



Maintain HOLD, Target Price of S$1.12.

  • While Raffles Medical’s share price may be at the upper band of its historical range, we believe it has priced in the gestation of its new hospitals in China and downside risks are limited based on our valuations, and given that FY19F-FY20F earnings have now factored in start-up losses from its new hospitals in China.


Where We Differ: Gestation period priced in, limited downside risks.

  • While we expect earnings to decline (though still profitable) during the gestation period of its new hospitals, we believe that earnings estimates and current share price has reflected this drop in earnings.


Potential Catalysts:

  • Better-than-expected ramp-up of new projects/new expansion plans; recovery of existing operations.


1Q19 results impacted by start-up losses, within expectations.

  • Raffles Medical's 1Q19 net profit fell 14% y-o-y to S$14m, marginally below expectations. Excluding start-up losses, NPAT grew 2.1% y-o-y. Revenues from healthcare and hospital divisions both grew.
  • Key highlights:
    1. Raffles Hospital Chongqing’s 1Q19 start-up losses within expectations;
    2. revenue from hospital division increased after three quarters of decline from higher utilisation; and
    3. MCH has turned profitable.


Valuation:

  • Our target price of S$1.12 is based on sum of parts, pegging FY18F/FY19F earnings to historical average PE (from 2013) of 27x plus S$0.20 per share for its China hospitals.


Key Risks to Our View:

  • Economic slowdown. While healthcare is relatively resilient, private healthcare could be impacted by a slowdown in the economy as elective procedures can be deferred or patients can choose public hospitals as a lower-cost alternative.


WHAT’S NEW - Investing for the future


1Q19 results impacted by start-up losses, within expectations; EBITDA + 1.6% y-o-y nevertheless.

  • Raffles Medical’s 1Q19 net profit fell 14% y-o-y to S$14m; marginally below our and consensus FY19 estimates, mainly impacted by start-up losses from the newly opened Raffles Hospital Chongqing. Excluding the start-up losses, 1Q19 revenue and NPAT would have grown 6.4% and 2.1% y-o-y respectively. The estimated amount of start-up losses for Raffles Hospital Chongqing was S$2m (after tax) and is within both management’s expectations and our estimates.
  • Revenue grew 7% y-o-y with growth seen in both healthcare services (+9% y-o-y) and hospital services (+3% y-o-y). The increased revenue in healthcare services division was mainly due to contributions from increase in premiums/claims from existing and new corporate clients (signed in FY18 to replace non-renewal clients in 2H17), Primary Care Network (PCN) scheme and projects. Hospital services revenue growth turned positive after three quarters of decline, mainly contributed by higher utilisation of inpatient capacities (mostly local inpatients) possibly led by higher-intensity cases. Revenue from foreign patients remained flat as demand stayed soft.
  • Raffles Medical's 1Q19 EBITDA grew 1.6% y-o-y despite start-up losses from Raffles Hospital Chongqing. Excluding the start-up losses, EBITDA would have grown 9.3% y-o-y. The estimated start-up cost was S$1.8m, within management’s guidance of estimated start-up EBITDA losses of S$8-10m in the first year of operations. While 1Q19 is still in its early stages, management is cautiously managing the cost and believes that gestation losses could shrink as the operations ramp up.
  • Raffles Medical's 1Q19 EBITDA margin fell 1ppt y-o-y to 18.4% (vs 19.4% in 1Q18) impacted by start-up losses. Excluding the start-up losses, EBITDA margin would have improved 0.4ppt y-o-y.
  • Raffles Medical went into a net debt position for the first time in 4Q18 at S$11m and this had increased to S$14m in 1Q19, as it raised its capex to expand its businesses. However, net gearing level is low and healthy as the group generates strong positive operating cashflow. However, we expect net gearing to increase as it invests in its two new hospitals.

Raffles Hospital refurbishment/renovations are expected to complete by mid-2019.

  • The refurbishment/renovations works on the existing building, which began in 2Q18, are almost completed.

Eight more clinics added to PCN; bodes well with the improved Chas and medical benefits for Merdeka Generation.

  • Raffles Medical was awarded a new tender to provide institutional medical services under the Ministry of Social and Family Development (MSF). Another eight clinics have been added to the panel of PCN clinics. This bodes well for Raffles Medical with the recently announced improved Chas and medical benefits for Merdeka Generation.

Raffles Hospital Chonqging opened on 2 January 2019; start-up costs/losses within expectations.

  • Raffles Hospital Chongqing opened and began operations on 2 January 2019 and saw some 500 patients (both inpatients and outpatients) in 1Q19. So far, the hospital has been receiving largely local, walk-in and cash-paying patients. However, management believes that the number of corporate and insurance patients will increase as more contracts/tie-ups are signed. Raffles Hospital Chongqing is currently in the process of being appointed by international insurance companies and has secured some corporate contracts from SOEs and MNCs. It has conducted some operations but has yet to take on complex surgeries especially in the early stages of the hospital’s operations.
  • Management has hired some 200 staff for the new hospital including some 30-50 staff seconded from its Singapore operations. Management believes the current staffing is sufficient and will consider increasing the number when operations pick up. Management is pleased that 1Q19 start-up losses came in within expectations and remains positive that start-up costs could be maintained q-o-q.

Raffles Hospital Shanghai expected to complete by 4Q19 (previously targeted to open by 2H19).

  • The construction works on Raffles Hospital Shanghai remain on track.
  • Preparatory works for commissioning and operational phase have begun in Singapore. They are expected to complete by 4Q19. Given that 1Q is typically a soft quarter with the Chinese New Year (CNY) festive period in China, management may consider opening the hospital after CNY.

MCH has turned profitable.

  • MCH had turned profitable in 4Q18 with revenue growing by double digits mainly from Vietnam and Cambodia. With MCH now being profitable and Raffles Medical increasing its stake in the former to 80% from 55% in October 2018, it is now planning for its next phase of growth with expansion plans in China and Vietnam.


Maintain HOLD rating; Target Price of S$1.12.

  • We maintain our HOLD rating and Target Price of S$1.12.
  • Raffles Medical’s share price is currently at 31-33x FY19F-20F PE (at 1 standard deviation [SD] above historical average) and 22-24x FY19F-20F EV/EBITDA. While Raffles Medical’s share price may be at the upper band of its historical range, we believe it has priced in the gestation of its new hospitals in China and downside risks are limited, based on our valuations and given that FY19F-FY20F earnings have now factored in start-up losses from its new hospitals in China.
  • In addition, 1Q19 start-up losses are still within expectations and a steady progressive growth in healthcare services contribution could help offset some start-up losses from its expansion in China.
  • However, if start-up losses incurred are higher than management’s estimates, this could impact our earnings forecasts, and rating.
  • Potential re-rating catalysts are:
    1. better-than-expected ramp-up of new projects/integration process,
    2. stronger-than-expected earnings growth from existing operations, and
    3. further accretive acquisitions and/or JVs/strategic alliances for entry into new markets.





Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-04-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.120 SAME 1.120



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